Real Business Cycles: A Legacy of Countercyclical Policies?

Satyajit Chatterjee

Vice President and Economist

January/February 1999

Business Review — Business cycles have troubled market-oriented economies since the dawn of the industrial age. The upward march of living standards in capitalistic countries has been repeatedly punctuated by periods of markedly high unemployment rates and slow growth or an outright decline in the living standard of the average person.

This alternating pattern of boom and bust is what the term business cycle means. In an article published in 1986, Edward Prescott forcefully argued that during the post-World-War II period, business cycles in the United States mostly resulted from random changes in the growth rate of business-sector productivity.¹ He showed that upswings in economic activity occurred when productivity grew at an above-average rate and downswings occurred when productivity grew at a below-average rate.

This article appeared in the January/February 1999 edition of Business Review.

Edward Prescott is a professor of Economics at the University of Chicago and a long-time research consultant to the Federal Reserve Bank of Minneapolis. The antecedents of his views appear in an article he wrote with Finn Kydland in 1982 and in a 1983 article by John Long and Charles Plosser.

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